Yellen Pick Gives Emerging Markets Time to Dodge QE Hit
South Korea said it expects Yellen will “consider well” the effects on other nations of reducing U.S. bond-buying. A deputy Indonesia central-bank chief said the pick would be positive for local and global financial markets, and a top economic official in India said it means extra time to narrow current-account gaps in developing nations whose currencies suffered over the summer.
The White House’s announcement came days before a gathering of financial leaders in Washington, where the Group of 20 plans to identify market turmoil from central banks’ stimulus withdrawal as a key risk to the global system. Emerging-market stocks plunged in May when Chairman Ben S. Bernanke signaled that record easing may be pared, then rebounded when the Fed maintained stimulus last month.
“Obviously Janet Yellen will delay tapering -- she has taken a more soft position on this,” Chakravarthy Rangarajan, chairman of Indian Prime Minister Manmohan Singh’s Economic Advisory Council, said in an interview in New Delhi today, referring to the prospect of postponed cutbacks in Fed asset purchases under Yellen. The lesson of the turmoil after May “is that the emerging economies need to keep a watch on the current account deficit.”
Stocks in Asia rallied following the Yellen news, with the MSCI Asia Pacific Index gaining 0.4 percent. Dubai’s benchmark DFM General Index (DFMGI) gained 0.2 percent, extending this year’s advance to 72 percent. Indonesia’s rupiah, which had tumbled 9.4 percent over three months from May 21 and was among the worst-hit emerging-market currencies, today advanced 0.4 percent against the dollar. The Mexican peso also appreciated 0.4 percent before pairing gains.
The premium that investors demand to hold emerging-market bonds over U.S. Treasuries declined for a fourth day, falling two basis points, or 0.02 of a percentage point, to 346, according to JPMorgan Chase & Co. indexes.
U.S. President Barack Obama will announce the nomination at 3 p.m. in Washington, a White House official said in an e-mailed statement. If confirmed by the Senate, Yellen, 67, would succeed Bernanke, 59, whose second four-year term ends in January.
“She has rich experience and an impressive resume as a policy maker,” Choi Hee Nam, director general of the South Korea finance ministry’s international finance bureau, said by phone from Sejong today. “I expect her to consider well the ripple effects on other countries” from policy decisions such as altering the Fed’s bond-buying program, Choi said.
Bank Indonesia Deputy Governor Perry Warjiyo said in a mobile-phone message today that tapering of U.S. stimulus may not come into effect immediately with Yellen’s appointment.
What would delay the withdrawal of the U.S. stimulus is the sluggish growth of the world’s biggest economy, Brazil’s Finance Minister Guido Mantega told reporters in Brasilia.
“The U.S. economy is not showing signs of strength, so it has grown below expectations,” Mantega said today. “This is what will determine whether the stimulus will continue.”
U.S. economic growth may slow to 1.6 percent this year from 2.8 percent in 2012, according to the median estimate of 81 economists in survey by Bloomberg.
Yellen’s nomination signals stability, policy continuity and a “steady course for the Fed,” Philippine Finance Secretary Cesar Purisima said, while Turkish Deputy Prime Minister Ali Babacan said it would bring a “person that we know and like,” according to remarks posted on CNBC-e website. “She is someone with technical weight and who would not be carried away with the wind. I believe Congress will approve of her.”
China’s central bank and Ministry of Foreign Affairs didn’t immediately respond to requests for comment. Li Daokui, a former People’s Bank of China academic adviser, said in an interview that Yellen’s appointment means there will be a “prolonged period of appreciation” for the yuan as additional “hot money” flows into China. That deepens a policy dilemma over whether to lower interest rates to reduce the attraction for inflows, or to gear policy more toward fighting inflation, Li said.
Cao Yongfu, a researcher who follows U.S. economic policy for the government-run Chinese Academy of Social Sciences, said Yellen’s nomination will help sooth China’s short-term concerns that an immediate tapering of Fed bond-buying would cause volatility in capital flows.
Even so, prolonged stimulus under Yellen may result in dollar depreciation and undermine the value of China’s foreign exchange reserves, Cao said. “Yellen’s big challenge will be to shift Fed policies back to normal from an ultra-loose stance -- you can’t always keep your foot on the gas.”
Chinese analysts weren’t the only ones seeing the potential for a weaker dollar as a result of Yellen’s ascendance. Koichi Hamada, an adviser to Japanese Prime Minister Shinzo Abe, said Yellen is “more likely to seek a way to make an economic recovery certain by keeping policy accommodative.” If prospects of an exit weaken, that may put pressure on the yen to rise, risking harm to Japan and boosting the need for the Bank of Japan to act, said Hamada, who doesn’t speak for the government.
‘Most Appropriate Person’
At the same time, Hamada said he would “very much welcome” Yellen’s appointment. “She has long experience in central bank policy and she understands the role of monetary policy in the macro economy. She is the most appropriate person to lead the Fed.”
Yellen won the nomination after former Treasury secretary and White House economic adviser Lawrence Summers withdrew from consideration when Democrats on the Senate Banking Committee expressed opposition to his candidacy.
As the Fed’s No. 2 official, she has articulated the case for maintaining highly accommodative monetary policy. In a series of 2012 speeches, she outlined why rates could remain near zero into late 2015, and in a 2011 speech she justified the Fed’s first two rounds of large-scale asset purchases, known as quantitative easing or QE, with an estimate that the programs would create 3 million jobs.
Yellen isn’t among the Fed policy makers who have pressed this year to pare back asset purchases, a group that includes Esther George, president of the Federal Reserve Bank of Kansas City, Jeffrey Lacker of Richmond, Richard Fisher of Dallas and Charles Plosser of Philadelphia.
“I assume Yellen’s nomination means QE for longer and the exit of QE is likely to be gentle,” said Dong Tao, head of Asia economics excluding Japan at Credit Suisse Group AG in Hong Kong. “That would be good news for China,” which is having difficulty maintaining growth momentum just as the “tides of global money printing” may start to turn, Tao said.
A Bloomberg Global Poll last month of investors, analysts and traders, conducted before Summers’s withdrawal, found 47 percent saying Yellen would preside over the same policy as Bernanke, with 17 percent saying it would be looser and 8 percent seeing tighter conditions. Thirty-five percent said Summers would provide less stimulus than Bernanke.
Yellen has been vice chairman of the Fed in Washington since 2010, helping to craft bond-buying and communication policies. As president of the Federal Reserve Bank of San Francisco in the six previous years, she monitored Asia and oversaw banks with foreign exposure, including Wells Fargo & Co.
She also deepened her institution’s ties to Asia, starting a biennial conference on Asia economic policy in 2009 that attracted central bank officials from China, South Korea, the Philippines, Taiwan and Singapore, according to a list of attendees on the bank’s website.
Yellen oversaw many of the biggest Asian banks doing business in the U.S., hosted Asian central bankers and financial regulators for get-togethers and traveled often to the region, said David Loevinger, former U.S. Treasury Department senior coordinator for China affairs.
She has a “deep understanding of Asian economies, banks and business practices,” said Loevinger, now an emerging-markets analyst at TCW Group Inc. in Los Angeles. “She was less prone to lecturing than other U.S. government officials. Asians appreciated that.”
The concern of emerging markets is that when the Fed does begin tapering its bond buying, it could hurt them by sparking an exodus of cash and higher borrowing costs. Brazil, Turkey, South Africa, India and Indonesia are the most vulnerable, Goldman Sachs Group Inc. strategists said in a Sept. 5 report.
By contrast, the International Monetary Fund said Oct. 7 that Canada, South Korea and Australia are among the countries best placed to weather any global market volatility from the withdrawal of U.S. monetary stimulus. The IMF and World Bank hold annual meetings this week in Washington, where G-20 finance ministers and central bankers will also gather.
Former Israeli central bank governor Stanley Fischer said today in Santiago that the Fed should begin easing its stimulus before Bernanke leaves office.
Even if it doesn’t serve as central bank to the world, the Fed is still entering a fresh era in which international events will increasingly shape its decisions, according to Barry Eichengreen, a professor at the University of California at Berkeley, where Yellen taught.
In a July paper, he said U.S. unemployment and inflation will be affected as globalization forces the U.S. to be more open to trade and financial transactions, emerging markets eat into its share of the world economy and the dollar’s role as the sole reserve currency is eventually eroded.
“Progressively the Fed is going to have to be more outward looking,” Eichengreen said in an August interview.
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